Josh Frydenberg is clear about what has been the hardest element of this year’s budget preparations, apart from his long absence from his young family. The answer is trying to navigate Australia out of the first recession in 30 years when politicians are armed with imperfect information.
Asked by Guardian Australia to nominate the biggest policy challenge associated with Tuesday’s statement, the treasurer says: “Managing what is a very uncertain environment and this huge responsibility to get people back to work.”
“It’s the complexity of the economic challenge and the uncertainty, overlaid with the responsibility,” he says.
We have embarked on the traditional pre-budget interview, a mildly ludicrous, high-velocity ritual – the journalistic equivalent of speed dating.
Friday’s conversations with media outlets are rigorously on the clock, and Frydenberg is armed with a briefing note that he rattles off at the start of every conversation, presumably to make sure he doesn’t lapse and share information that’s not part of the media plan.
The government has made it clear there will be tax cuts, more concessions for business, including an overhaul of research and development concessions, a big infrastructure spend and labour market programs that help people into employment as income support tapers.
The briefing note yields a few insights. One of the most interesting is the impact of the collapse of net overseas migration on the budget. Migration has been previously projected to fall from 154,000 people in 2019-20 to around 34,000 in 2020-21. Unsurprisingly, given events, migration will now be booked as an outflow in both financial years.
Migration accounts for about 60% of Australia’s population growth. The fertility rate has also been hit in the crisis. Fewer migrants and fewer babies will have a negative impact on economic growth, prolonging the downturn.
Asked whether there is now an obvious economic case to increase the number of migrants once the border reopens, and assuming a successful Covid vaccine emerges, Frydenberg cautiously opens that possibility.
“We will have to keep reassessing the situation in light of developments on the borders because migration has been an important part of Australia’s economic growth story,” he says.
He notes there is a broader impact from lower migration than suppressing population growth. Less migrants “also impacts workforce participation because the median age of a migrant is less than the population more generally”.
“We’ll continue to reassess the numbers of net overseas migration in light of what is happening on the borders. Migration is important to the growth story.”
Frydenberg says Tuesday’s budget will be about the “here and now” – and the most pressing issue in the here and now, in his definition, is getting the unemployment rate down. Figures from the briefing note are rattled off.
“The focus is on unemployment and it’s at now 6.8%. Of those who actually lost their job – 870,000 – 460,000 of those people are now back at work.”
The treasurer says women made up 54% of the jobs lost but they are 60% of the jobs that have been gained as the economy outside of Victoria has mounted a patchy recovery. He says of the 870,000 people who lost jobs because of the lockdowns, 333,000 were young people aged 15 to 24.
“But of the 460,000 that have come back, 181,000 are young people – 38% of the jobs lost have been young people and 39% of the jobs gained have been young people. They were hit hardest and hit first, but the positive trend is those jobs are starting to come back”.
Back in June, the government forecast Australia’s unemployment rate would swell to 9.25%. That forecast was upped to 10%, but Frydenberg says Tuesday’s budget will revise that back below 10%. I ask him for the number, but the treasurer isn’t yielding. “It will be above 6.8% and below 10%,” he says.
Unemployment will continue to rise because of the lockdown in Victoria and because of an increase in the participation rate. Frydenberg trots out the economists adage about unemployment during economic downturns: it goes up the elevator and down the stairs.
He notes that after the recession of the 1980s, the unemployment rate took six years to trend back down to under 6%. In the 1990s, it took 10 years to correct “and [now] we don’t have monetary policy available”. The concern is unemployment will take a long time to unwind without active intervention and “that’s not only boosting aggregate demand, that’s also supply side and the like”.
He says young people entering the labour force now are expected to get 8% less in their pay packets during their first year of earnings as a consequence of this crisis, and in five years time, that will be 3.5% less “and that is those who have a job – that’s why the budget is really focused on employment”.
Frydenberg has telegraphed the government won’t embark on the serious business of budget repair until the unemployment rate is comfortably below 6%. I ask why 6%? Why not 5%? Or 8%? He says the objective is to get back to where the labour market was before the coronavirus shock hit. “When we came to government, the unemployment rate was 5.7% and we got it down to 5.1% in February.”
He says if unemployment returns to below 6% “you are gaining momentum in the economic recovery, you are getting the improvements we are striving for, so getting us on the steady trajectory down is behind the thinking and the work”.
I ask him whether it is time to revisit the Reserve Bank’s inflation target as part of removing any artificial restraints on economic growth. Frydenberg says he has no plans to go there at this point.
“Inflation is going to be low for some time. My focus right now is using the levers available to us to get more people back into work and strengthen the economy.”
To encourage activity in the residential construction sector, the government will also extend the first-home buyer loan scheme until 30 June 2021, with increased price caps.
